SEC Says Adios To Hedge Fund Registration Rule

Aug 11 2006 | 12:00am ET

The Securities and Exchange Commission is waving the white flag in its battle to save the controversial hedge fund registration requirement. This week, SEC Chairman Christopher Cox announced the agency would not appeal a June 23 court decision that vacated the rule, calling it “arbitrary.” But Cox warned that hedge funds are not off the hook yet when it comes to SEC scrutiny.

“Since the appellate court’s decision was based on multiple grounds and was unanimous, further appeal would be futile and would simply delay and distract from our goal of advancing investor protection,” Cox said in a statement. But he went on to say, “Notwithstanding the Goldstein decision, it is important to point out that hedge funds today remain subject to SEC regulations and enforcement under the antifraud, civil liability and other provisions of the federal securities laws.”

Cox said that the SEC’s new tack would be similar to the one he laid out on July 25 before the Senate Banking Committee. “The Commission is moving aggressively on an agenda of rulemaking and staff guidance—some of which may be issued as early as this week,” he said. That includes a new anti-fraud rule addressing a “side-effect” under the court decision, which made current antifraud rules applicable only to clients, and not investors, of hedge funds. The new rule will “look through” a hedge fund to its investors.

In addition, the SEC is considering a redefinition of “qualified investor” that would raise the minimum asset and income requirements for investing in hedge funds. Cox also said staff guidance would address grandfathering and “other miscellaneous relief necessitated by the vacating of the rule.” And though the registration requirement is dead, Cox said the SEC would encourage funds already registered to remain so. The Commission will try to “eliminate disincentives for voluntary registration, and enable hedge fund advisers who are already registered under the rule to remain registered,” he said. 

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